Seeing a company you’ve invested in struggle can feel unsettling. It’s not something any investor hopes to face.
But sometimes, even businesses that once looked strong can fall on hard times. When that happens, it’s natural to wonder what it means for your investment.
It’s a confronting situation. But knowing what to expect can help you feel more prepared and less overwhelmed.
This article explores what bankruptcy means, what happens to your shares, and what steps typically follow. The more you understand, the more confident you can feel navigating whatever comes next.
What does it mean when a company goes bankrupt?
When a company goes bankrupt , it simply means it can’t pay its debts. It owes more money than it can repay.
Bankruptcy isn’t always the end of the road, though. Sometimes it’s the start of a process that gives the company a chance to recover or wind down properly.
In Australia, there are two main paths when a company goes bankrupt:
- Voluntary administration: The company brings in an independent expert to try and turn things around. They might restructure debts, sell assets, or find a buyer. The goal is to give the company breathing room while a plan is made.
- Liquidation: If saving the business isn’t possible, it moves into liquidation. This is when the company’s assets are sold, and the money is used to pay creditors in a set order.
It’s important to know that bankruptcy doesn’t always mean a company disappears overnight. Administration gives a company a chance to recover. Liquidation involves winding down and ending operations.
For investors, voluntary administration often means a long period of uncertainty. Trading may be suspended, and outcomes are never guaranteed.
Some companies survive administration and come back stronger. Others eventually move into liquidation if a rescue plan isn’t possible.
What happens to my shares if a company goes bankrupt?
Your shares can lose value quickly after a company goes bankrupt. In some cases, they might become worthless.
Trading of the company’s shares is often suspended. This means you can’t buy or sell them on the stock exchange while decisions are made about the company’s future.
Even if trading continues for a time, share prices often fall sharply. Investors usually react fast when a company’s financial troubles are made public. Here’s what that looks like:
- Panic selling : In many cases, it's emotional. When people see bad news, fear takes over and they rush to sell shares before prices fall even further. It’s a “get out now” response, not always a considered move.
- Institutional investors pulling out: Big fund managers and professional investors might also start selling large holdings. Because they control so much of the market, their actions can speed up the drop in share price.
- Automatic trading triggers: Some investors use automatic stop-loss orders . These are instructions to sell a stock if it falls to a certain price. When bankruptcy news hits, these orders can trigger without anyone pressing a button in real time.
- Lower buyer interest: At the same time, fewer people want to buy shares in a company that might collapse. That pushes prices down even faster, making it hard to sell without accepting a much lower price.
Most of the time, there’s little or no money left over for shareholders once everyone else has been paid. It’s a tough reality, but an important one to understand when investing in individual companies.
Can I sell my shares after a bankruptcy announcement?
Once a company announces bankruptcy, selling your shares can become tricky.
As we mentioned earlier, in many cases, the stock exchange will suspend trading. This means you won’t be able to buy or sell the company’s shares through the market as usual.
Sometimes, shares might later move to over-the-counter (OTC) markets. These are private markets where buying and selling is less formal. But trading on OTC markets can be slow, complicated, and unpredictable. Prices often swing wildly, and finding a buyer isn’t guaranteed.
Even if you could sell quickly, it may not be worthwhile. As we’ve said, after a bankruptcy announcement, share prices often fall sharply. You might be forced to accept a much lower price – or no meaningful return at all.
Many investors hold onto their shares because selling isn’t possible, or because they want to wait and see if the company’s situation improves. Neither option is without risk.
How likely am I to get any money back?
So, yeah... in these situations, getting any money back as a shareholder can be difficult. When the company’s assets are sold, there’s an order for who gets paid first:
- Secured creditors: These are lenders with a legal claim over the company’s assets. They are the first in line.
- Unsecured creditors: Suppliers, service providers and others without specific claims come next.
- Bondholders: Investors who lent money through bonds are usually after unsecured creditors.
- Shareholders: Shareholders are last in line.
By the time secured and unsecured debts are covered, there’s usually not much left. That’s why shareholders often lose most (if not all) of their investment when a company collapses.
What about dividends? Are they still paid?
When a company goes bankrupt, dividends usually stop straight away. Even if a dividend was declared earlier, it still might not be paid.
Dividends are only paid if there are enough available funds after meeting other financial obligations. Many times, there aren’t.
It’s not an ideal outcome for investors who counted on regular income, but it reflects the company’s financial reality.
Case studies: real-world examples
Let’s look at real examples to bring the impacts of company bankruptcy to life.
Dick Smith Holdings (2016)
Dick Smith was once a well-known electronics retailer across Australia and New Zealand.
In early 2016, the company went into voluntary administration after poor sales and heavy debt. Investors saw the company’s share price collapse from over $2 to almost nothing.
Trading was suspended, and shareholders lost their entire investment when Dick Smith entered liquidation. Customers lost out too – they were told any Dick Smith gift cards bought for Christmas in 2015 wouldn’t be honoured. Talk about poor timing.
The collapse became a reminder that even established brands can fail when business fundamentals weaken.
Virgin Australia (2020)
Virgin Australia entered voluntary administration during the early months of the COVID-19 pandemic in 2020.
Travel restrictions hit revenue hard, and the company struggled under the weight of existing losses and high debt. Major shareholders – including Singapore Airlines, Etihad Airways, HNA, Nanshan, and Virgin Group – collectively held 90% of the stock, while smaller investors made up the rest.
During administration, Virgin Australia was sold to new owners. However, existing shareholders were wiped out as part of the restructure.
The business survived, but the original investors didn’t recover their money.
How can I reduce my risk of being caught out?
When you invest in a company, there’s no way to avoid risk completely. Even the most careful investor can be impacted by an unexpected company collapse.
But there are ways to reduce the chance of one event derailing your progress:
- Diversify across sectors and companies : Investing in a range of businesses (not just one or two) can potentially help spread risk. If one fails, others may hold steady.
- Keep an eye on company fundamentals : Do your research and look at key information found in quarterly earnings reports . While no one can predict the future, signs like rising debt or falling profits can hint at deeper issues.
- Question your risk tolerance before investing in speculative stocks : Fast-growing or highly volatile companies can carry more risk. It’s worth being clear on how much exposure you’re comfortable with.
It’s impossible to avoid every bump. But with a balanced approach and a bit of awareness, you can stay focused on the bigger picture.
You can’t predict, but you can prepare
No one wants to see a company they’ve invested in go under. It’s frustrating, confronting, and can shake your confidence.
But it’s also part of the reality that comes with investing. These moments, while rare, do happen.
What matters is how you prepare. Staying informed, keeping diversified investments , and understanding the risks can make a big difference.
You won’t always see it coming. But with the right mindset, even a tough experience can be something you learn from, not just something you get through.
Knowledge won’t erase the sting, but it can make it easier to move forward. And sometimes, that’s all you need.
All figures and data in this article were accurate at the time it was published. That said, financial markets, economic conditions and government policies can change quickly, so it's a good idea to double-check the latest info before making any decisions.
